Audi Bets Chinese Love Small Cars Too After Seeking More Legroom

Audi AG (NSU) gave China’s chauffeur-driven bureaucrats and businessmen the legroom they wanted by
stretching its flagship sedans. Now the German automaker is
betting there’s also demand for small luxury cars.

The Volkswagen AG (VOW) unit will begin producing two versions of
its A3 compact this year at its new factory in Foshan, China,
with the first cars reaching dealerships in the first half of
2014, according to Audi China President Dietmar Voggenreiter. By
manufacturing the A3 locally, Audi can reach Chinese consumers
with a smaller budget by offering a cheaper model than
Bayerische Motoren Werke AG and Daimler AG’s Mercedes-Benz.

“With the compact cars, we bring new customers to the
brand and hopefully we can keep them over their lifetime,”
Voggenreiter said in an interview in Shanghai last week. “In
the long run we will see higher growth rates in the premium
market and one factor will be especially the compact segment.”

So far, consumers appear to agree. Audi will show the A3 at
the Guangzhou Auto Show this week, targeting the market for
premium compacts that IHS Automotive forecasts will expand by 50
percent next year, five times the pace of mid-market brands.
China will overtake the U.S. to become the top market for luxury
vehicles by 2016, according to McKinsey Co.

Premium Buyers

“Step-by-step, you’d want to capture all of the premium
customer segments, that’s why they’re going into smaller models
and niches,” said Andreas Graef, a Shanghai-based consultant atA.T. Kearney, which advises automakers in China. “There’s still
a significant portion of people that want to go premium and they
might not only want big premium cars.”

The move to go small follows Audi’s local production ofsport utility vehicles in 2010 and introduction of sports cars
like the TT and R8. The Ingolstadt, Germany-based automaker is
expanding its lineup of products to appeal to Chinese buyers
seeking options beyond the standard business sedan as the market
matures and growth rate slows.

SUVs made up 36 percent of the premium vehicle market in
China, compared with 38 percent in the U.S. and 24 percent in
Western Europe, according to Audi.

Audi’s sales growth in China, including Hong Kong, has
slowed to 20 percent in the first 10 months of this year. That
compares with the 31 percent growth in the same period last year
and 32 percent in 2011, according to data from the company.

To be sure, Audi runs the risk of diluting its brand by
going into smaller cars in China, said Janet Lewis, a Hong Kong-based analyst at Macquarie Group Ltd.

Brand Dilution

“If they lose their ability to be viewed as a luxury
carmaker, and people back off from the brand in China, then
obviously they would’ve made the wrong decision,” Lewis said.
“But it’s very early in this market, so I wouldn’t be saying a
company has made the right strategy or the wrong strategy
because they’ve decided to go down market.”

The China-made A3 would cost less — Audi hasn’t announced
the price — than the 255,000 yuan ($42,000) imported model
because of the exemption of a 25 percent customs duty. By
comparison, BMW’s locally produced 3-series and Mercedes-Benz’s
C-class sedans start from 283,000 yuan and 315,000 yuan,
respectively. Mass-market models such as the Buick Regal, Ford
Mondeo and Toyota Camry start from about 180,000 yuan, according
to prices on the companies’ websites.

BMW declined to comment on its plans for local production
of compact cars, while Mercedes-Benz didn’t respond to e-mailed
questions.

Audi’s target customers for the A3 are younger middle-class
consumers who want to own a smaller premium vehicle, owners of
mass-market brands looking to upgrade to a luxury marque, and
families in the market for a second car, Voggenreiter said. He
declined to give a sales target for the model.

“Everybody thought a premium car must be a big car, but
when the market gets more experienced and mature, the customer
knows for different purposes, you have different cars,” said
Voggenreiter, who predicts the automaker will probably outpace
the industry in sales next year. “You also have two bags, you
have an expensive shopping bag and one for the opera.”

To contact Bloomberg News staff for this story:
Alexandra Ho in Shanghai at
aho113@bloomberg.net

To contact the editor responsible for this story:
Young-Sam Cho at
ycho2@bloomberg.net

Audi A3 Produced in Germany

A row of Audi A3 automobiles, produced by Volkswagen AG’s Audi brand, wait for their final inspection as they move along the production line at the company’s plant in Ingolstadt, Germany.

A row of Audi A3 automobiles, produced by Volkswagen AG’s Audi brand, wait for their final inspection as they move along the production line at the company’s plant in Ingolstadt, Germany. Photographer: Guenter Schiffmann/Bloomberg

Nov. 15 (Bloomberg) — Johan de Nysschen, president of Infiniti, talks about the Nissan Motor Co. luxury brand’s expansion strategy in China.
Infiniti is targeting 10 percent of the world premium market by 2020. To do that, the marque has to win market share from Volkswagen AG’s Audi, Bayerische Motoren Werke AG and Daimler AG’s Mercedes-Benz in China. De Nysschen spoke with Bloomberg Television’s Zeb Eckert on Oct. 31. (Source: Bloomberg)